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61sT  Congress 
2d  Session 


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Document 
No.  406 


NATIONAL  MONETARY  COMMISSION 


AN  ADDRESS 


SENATOR  NELSON  W.  ALDRICH 

BEFORE  THE  ECONOMIC  CLUB  OF  NEW  YORK 
NOVEMBER  29,  1909 


THE  WORK  OF  THE  NATIONAL 
MONETARY  COMMISSION 


Washington  :  Government  Printing  Office  :  1910 


61ST  Congress  1  SENATE  i  Document 

2d  Session       )  \     No.  406 


NATIONAL  MONETARY  COMMISSION 


AN  ADDRESS 


SENATOR  NELSON  W.  ALDRICH 

BEFORE  THE  ECONOMIC  CLUB  OF  NEW  YORK 
NOVEMBER  29,  1909 


THE  WORK  OF  THE  NATIONAL 
MONETARY  COMMISSION 


Washington  :  Government  Printing  Office  :  1910 


NATIONAL  MONETARY  COMMISSION. 


Nbuson  W.  Aldrich,  Rhode  Island,  Chairman. 
Edward  B.  Vreei,and,  New  York,  Vice-Chairman. 


JVhTus  C.  Burrows,  Michigan. 
Eugene  Hale,  Maine. 
Philander  C.  Knox,  Pennsylvania. 
Theodore  E.  Burton,  Ohio. 
John  W.  Daniel,  Virginia. 
Henry  M.  Teller,  Colorado. 
Hernando  D.  Money,  Mississippi. 
Joseph  W.  Bailey,  Texas. 


Jesse  Overstreet,  Indiana. 
John  W.  Weeks,  Massachusetts. 
Robert  W.  Bonynge,  Colorado. 
Sylvester  C.  Smith,  California. 
Lemuel  P.  Padgett,  Tennessee. 
George  F.  Burgess,  Texas. 
Ars£;ne  p.  Pujo,  Louisiana. 
Arthur  B.  ShELTOn,  Secretary, 


A.  Piatt  Andrew,  Special  Assistant  to  Commission, 


THE  WORK  OF  THE  NATIONAL 
MONETARY  COMMISSION. 

Mr.  Aldrich.  Mr.  President  and  Gentlemen  of  the  Eco- 
nomic Club: 

I  shall  ask  your  attention  to  an  examination,  which  must 
necessarily  be  incomplete,  of  some  of  the  methods  employed 
in  modem  times  in  the  great  commercial  nations  of  Europe 
to  prevent  financial  panics  or  to  relieve  congestion  and 
dangerous  pressure  in  the  money  markets. 

Credit  furnishes  a  vital  element  in  all  healthy  economic 
life.  Credit  is  based  upon  confidence ;  and  confidence  in  a 
monetary  system  rests  upon  belief  in  the  strength,  stability, 
and  efficiency  of  financial  institutions.  To  secure  an 
organization  of  capital  and  credit  by  which  confidence  can 
be  firmly  established,  and  credit  maintained  under  all  cir- 
cumstances and  conditions,  is  the  task  committed  to  the 
National  Monetary  Commission. 

The  immediate  occasion  which  led  to  the  appointment 
of  the  commission  was  the  financial  crisis  of  1907,  whose 
disastrous  results  can  never  be  measured,  and  whose 
destructive  influences  were  felt  throughout  the  world. 
The  shrinkage  in  the  value  of  property  and  securities 
which  then  took  place,  together  with  losses  arising  from  a 
paralysis  or  suspension  of  business,  amounted  to  thousands 
of  millions  of  dollars.  The  country  escaped  by  the  narrow- 
est possible  margin  from  a  total  collapse  of  all  credit  and  a 
wholesale  destruction  of  all  values. 

To  the  great  majority  of  the  people  of  the  country  the 
blow  came  without  a  warning.  Most  of  our  banking  insti- 
tutions were  in  excellent  condition,  business  of  every  kind 
was  prosperous,  labor  was  fully  employed  at  satisfactory 


211274 


National    Monetary     Commission 

wages,  industries  of  every  kind  were  flourishing.  Our  peo- 
ple were  full  of  liope  and  confidence  for  the  future.  Sud- 
denly the  banks  of  the  country  suspended  payment,  and 
acknowledged  their  inability  to  meet  their  current  obliga- 
tions on  demand.  The  results  of  this  suspension  were 
felt  at  once;  it  became  impossible  in  many  cases  to  secure 
funds  or  credit  to  move  crops  or  to  carry  on  ordinary 
business  operations;  a  complete  disruption  of  domestic 
exchanges  took  place ;  disorganization  and  financial  embar- 
rassment affected  seriously  every  industry ;  thousands  of 
men  were  thrown  out  of  employment,  and  the  wages  of  the 
employed  were  reduced.  The  men  engaged  in  legitimate 
business  and  the  management  of  industrial  enterprises  and 
the  wage-earners  throughout  the  country,  who  were  in  no 
sense  responsible  for  the  crisis,  were  the  greatest  sufferers. 

As  an  indication  of  its  effect  upon  the  business  of  the 
country  I  will  refer  to  the  falling  off  in  the  production  of 
pig  iron,  it  being  understood  by  economists  and  students 
that  in  a  certain  sense  the  production  of  iron  and  steel  is  a 
barometer  of  general  business  conditions.  The  production 
of  pig  iron  in  1907  was,  in  round  numbers,  25,000,000  tons, 
and  in  1908  it  was  15,000,000  tons,  or  a  reduction  of  40  per 
cent. 

Possibly  a  corresponding  reduction  did  not  occur  in  all 
industries  and  in  all  kinds  of  business,  but  the  blight  which 
this  crisis  created  was  felt  in  nearly  every  household.  The 
farmer,  with  his  crops  unsold  and  for  the  time  unsalable, 
the  men  employed  in  all  industries,  alike  felt  its  injurious 
effects. 

The  crisis  of  1907  was  one  of  a  series.  I  remember  very 
well — although  probably  few  of  you  do— the  financial  crash 
of  1873.  I  ^^  sure  you  all  remember  that  of  1893,  from 
the  effects  of  which  the  country  did  not  recover  for  many 
years.  Between  1900  and  1907  we  had  recurring  periods 
of  depression,  of  dangerous   perturbations   in   the  money 


Address     by     Senator    A  I  d  r  i  c  h 

market,  when  the  Secretary  of  the  Treasury  was  frantically 
called  upon  for  assistance,  and  felt  obliged  to  adopt  the  very 
questionable  policy  of  making  large  deposits  of  public 
money  in  banks  to  relieve  threatening  situations. 

If  we  should  undertake  to  measure  in  dollars  and  cents 
the  effects  of  these  recurring  periods  of  depression  and  of 
crisis,  it  would  be  an  extremely  difficult  task.  It  is  evidentj 
however,  that  while  our  country  has  natural  advantages 
greater  than  those  of  any  other,  its  normal  growth  and 
development  have  been  greatly  retarded  by  this  periodical 
destruction  of  credit  and  confidence. 

I  believe  that  no  one  can  carefully  study  the  experience 
of  the  other  great  commercial  nations  without  being  con- 
vinced that  disastrous  results  of  recurring  financial  crises 
have  been  successfully  prevented  by  a  proper  organization 
of  capital  and  by  the  adoption  of  wise  methods  of  banking 
and  of  currency. 

Of  course,  until  human  nature  is  changed,  it  will  not  be 
possible  to  prevent,  by  legislation  or  otherwise,  periods  of 
overspeculation,  with  undue  inflation  of  values  and  overex- 
tension of  credit.  When  we  consider  the  characteristics  of 
the  American  people,  whose  unrivaled  energy  and  enter- 
prise are  not  always  confined  by  the  limits  of  prudence,  it  is 
certain  that,  we  in  the  United  States  shall  always  have 
periods  of  speculative  inflation,  with  the  evil  results  which 
are  sure  to  follow.  Other  countries,  however,  have  been 
able  to  prevent  disastrous  panics  and  to  confine  the  evil 
results  of  overspeculation  and  inflation  in  the  main  to  the 
people  directly  interested^-that  is,  to  the  people  who  have 
violated  the  fundamental  laws  of  business  and  to  their 
financial  backers  and  supporters. 

There  has  been  no  general  suspension  of  banking  institu- 
tions and  no  general  destruction  of  credit  in  any  of  the 
leading  countries  of  Europe  for  more  than  half  a  century. 
There  have  been  periods  when  great  financial  institutions 


National    Monetary     Commission 

or  great  merchants  have  failed  and  great  losses  have  resulted, 
but  at  no  time  has  there  been  any  general  suspension.  It 
is  now  believed  by  competent  authorities  that  the  authorized 
suspension  of  the  English  bank  act  in  1847,  1857,  and  1866 
could  have  been  avoided  by  the  use  of  the  modern  methods 
of  treatment.  These  suspensions  permitted  the  issue  of  an 
unlimited  amount  of  notes  by  the  Bank  of  England,  but  on 
only  one  of  these  occasions  were  any  additional  notes  issued. 
In  the  other  cases  the  mere  announcement  of  the  suspension 
restored  confidence,  and  the  business  of  the  country  went  on. 

Coming  to  the  events  of  recent  years,  which  have  greater 
interest  for  us,  there  has  been  but  one  occasion  of  serious 
financial  trouble  in  England  since  1866 — the  Baring  failure 
in  1890.  The  Baring  Brothers  were,  as  you  know,  one 
of  England's  greatest  merchant  houses,  with  connections 
extending  throughout  the  world,  and  they  had  become  inter- 
ested in  operations  and  speculations  on  an  enormous  scale  in 
the  Argentine  and  elsewhere,  which  resulted  in  the  failure  of 
the  house.  The  prompt  action  of  the  Bank  of  England,  in 
connection  with  the  Bank  of  France,  the  Bank  of  Russia,  and 
certain  financial  institutions  in  London,  prevented  any  wide 
extension  of  the  difficulties.  The  Barings  and  their  asso- 
ciates were  the  principal  sufferers,  and  the  business  of  the 
country  and  of  its  industries  and  institutions  went  on  as 
usual. 

The  strength  of  the  French  system  was  tried  in  1882 
by  the  failure  of  the  Union  Generale,  one  of  the  great 
joint-stock  banks  of  Paris,  and  in  1889  by  the  collapse  of 
the  copper  syndicate,  and  the  downfall  of  the  Comptoir 
d'Escompte — the  oldest  of  the  great  French  joint-stock 
banks.  But  the  prompt  and  efficient  action  of  the  Bank 
of  France  in  both  cases  prevented  any  spread  of  the 
troubles,  and  the  business  of  France  went  on  as  usual,  the 
only  sufferers  being  these  institutions  and  their  immediate 
friends. 


Address     by     Senator    A  I  d  r  i  c  h 

In  1 90 1  the  Leipziger  Bank — one  of  the  great  institutions 
of  Germany — failed,  creating  consternation  in  Leipzig  and 
giving  rise  to  trouble  within  an  important  but  limited 
circle.  In  that  case  the  prompt  and  efficient  intervention 
of  the  Reichsbank  prevented  any  spread  of  the  difficulty, 
and  German  interests  and  industries  did  not  suffer  as  ours 
did  in  the  recent  panic. 

In  calling  your  attention  to  the  experience  of  these  coun- 
tries in  this  respect  I  do  not  wish  to  be  misunderstood.  I 
do  not  believe,  and  I  do  not  think  any  member  of  the  Com- 
mission believes,  that  we  could  adopt  for  the  United  States 
the  system  of  any  of  these  countries ;  certainly  not  without 
very  many  material  modifications.  But  in  view  of  the  facts 
to  which  I  have  alluded,  I  believe  that  the  experience  of 
these  countries,  with  centuries  of  economic  life,  and  where 
human  nature  is  much  the  same  as  in  ours,  where  every 
financial  problem  receives  careful  and  intelligent  considera- 
tion, and  where  vast  financial  transactions  are  constantly 
taking  place,  should  certainly  be  suggestive  and  valuable 
to  us.  These  countries — Germany  especially — are  second 
only  to  the  United  States  in  industrial  development  and 
material  progress.  Preliminary  to  an  investigation  of  the 
banking  methods  of  the  three  great  commercial  nations, 
it  is  necessary  to  consider  the  character  of  their  banking 
organizations.  I  will  make  my  statement  in  this  respect 
as  brief  as  possible. 

The  English  system  consists  of  the  Bank  of  England ;  a 
number  of  important  joint-stock  banks,  which  do  most  of  the 
commercial  business  of  the  country ;  discount  houses,  which 
occupy  a  unique  position  in  the  English  system,  being  in- 
termediaries between  borrowers  and  the  commercial  banks 
and  between  the  commercial  banks  and  the  Bank  of  England ; 
merchant  houses,  or  financing  institutions ;  and  trustee  and 
postal  savings  banks.  The  credit  institutions  of  France 
are  composed  of  the  Bank  of  France,  the  great  joint-stock 


National    Monetary     Commission 

banks,  like  the  Credit  Lyonnais  (which,  by  the  way,  is  in 
certain  respects  the  greatest  commercial  bank  in  the  world) 
and  the  Comptoir  d'Kscompte;  a  mortgage  bank,  the  Credit 
Foncier,  which  is  under  government  control,  issuing  its  own 
obligations  against  mortgages  held  by  the  bank ;  promoting 
or  syndicate  banks,  like  the  Bank  de  Paris  et  des  Pays  Bas ; 
and  cooperative,  agricultural,  and  savings  banks. 

To  my  mind  the  system  of  Germany  is  for  us  the  most 
interesting  of  any,  because  the  German  Empire  has  very 
largely  the  same  industrial  and  commercial  interests  that 
we  have  in  the  United  States.  The  German  was  the  last 
of  these  great  financial  systems  to  be  reorganized,  and  her 
financial  legislation  has  been  recently  modified  as  a  result  of  a 
very  impoitant  inquiry  made  by  a  commission  appointed  in 
1908. 

We  have,  it  is  true,  conditions  that  do  not  exist  in  Ger- 
many. For  instance,  we  make  a  much  greater  use  of  checks 
and  other  credit  instruments.  The  Germans,  however,  realiz- 
ing the  importance  of  giving  to  their  financial  institutions 
this  great  element  of  credit  elasticity,  are  trying  to  encourage 
their  increased  use.  The  German  system  includes  the  Reichs- 
bank,  and  a  considerable  number  of  large  joint-stock  banks, 
like  the  Deutsche  Bank,  the  Dresdner  Bank,  and  the  Disconto- 
Gesellschaft;  the  latter  are  commercial  banks,  but  they  also 
do  more  or  less  of  an  underwriting  or  syndicate  business. 
This  syndicate  or  promoting  business  is  limited  to  a  reason- 
able percentage  of  the  capital  of  the  bank,  and  so  far  as  I 
have  been  able  to  discover  has  not  produced  any  injurious 
results.  Germany  has  also  banks  of  many  descriptions  that 
were  novel  and  very  interesting  to  me.  For  instance,  she 
has  thousands  of  cooperative  credit  societies  (Genossen- 
schaften),  which  have  different  functions  from  those  of  any 
other  banks  that  I  know  of  elsewhere.  They  are  something 
like  our  mutual  savings  banks  in  that  they  are  established 
and  managed  by  the  leading  citizens  of  the  locality — farmers, 


Address     by     Senator     A  I d  r  i  c  h 

teachers,  or  lawyers — who  usually  serve  without  compensa- 
tion. They  are  conducted  for  the  benefit  of  the  members, 
who  are  usually  the  small  borrowers  and  small  depositors  of 
the  neighborhood.  They  take  very  small  deposits  and  make 
loans  of  very  small  sums.  If  a  man  wants  to  buy  a  cow,  for 
instance,  or  wants  money  advanced  upon  his  crops,  or  for  any 
of  the  great  mass  of  minor  wants  of  men,  a  loan  is  made  by 
one  of  these  cooperative  societies.  They  do  not  compete  to 
any  great  extent  with  the  commercial  banks. 

In  addition  to  these,  Germany  has  land-mortgage  banks 
of  different  classes,  some  that  take  mortgages  on  urban  prop- 
erties and  issue  securities  against  them,  and  some  that 
perform  a  like  service  in  the  case  of  land  in  the  country. 
Germany  has  also  a  class  of  communal  and  county  savings 
banks,  which  are  unique  in  their  character.  Germany  has 
several  other  classes  of  banks — parts  of  her  general  system — 
but  I  shall  not  have  the  time  to-night  to  take  them  up  and 
consider  them  separately.  Inasmuch,  however,  as  we  pro- 
pose to  give  an  accurate  description  of  all  of  them  in  the 
literature  which  we  shall  soon  publish  on  this  subject,  I 
hope  they  will  receive  your  careful  consideration. 

The  Germans  have  given  great  attention — as  they  do 
to  every  detail  of  all  subjects  of  public  interest — to  the 
character  and  organization  of  their  various  financial  institu- 
tions. These  different  institutions  are  all  parts  of  a  com- 
prehensive system,  and  all  depend  absolutely  upon  the 
Reichsbank  for  reserves  and  for  assistance  in  time  of 
trouble.  The  continued  existence  of  the  entire  financial 
structure  of  each  of  these  countries  depends  upon  the 
strength  of  its  central  institution  and  upon  the  wisdom  of 
its  management. 

The  suggestions  which  I  shall  make  to-night  with  ref- 
erence to  methods  employed  to  relieve  conditions  of  panic 
do  not  involve  any  examination  of  the  functions  of  any  of 
these  different  institutions,  except  the  central  banks  and 
the  joint-stock  banks  of  deposit  and  discount. 
30657—10 2  9 


National     Monetary     Commission 

I  will  first  ask  your  attention  to  the  character  of  the  cen- 
tral institutions.  The  central  banks  of  these  countries  are 
not  altogether  alike,  yet  they  are  not  unlike.  They  have 
many  characteristics  in  common.  The  principal  functions 
of  these  banks  are  not  defined  by  legislative  acts.  Thev 
are  the  outgrowth  of  centuries  of  experience,  and  have 
been  essentially  modified  from  time  to  time  through  a 
process  of  evolution  to  meet  existing  requirements,  until 
it  may  be  fairly  said  that  their  most  important  features  are 
such  as  it  has  been  found  necessary  to  adopt  within  the  last 
generation,  to  answer  the  demands  of  modem  conditions. 
For  instance,  many  of  the  great  functions  of  the  Bank  of 
England  to-day  concern  matters  not  referred  to  in  the  dis- 
cussions which  preceded  the  adoption  of  the  Peel  Act  in 
1844.  The  position  occupied  by  the  great  central  banks, 
their  duties  and  obligations  (which  they  are  not  always 
willing  to  acknowledge  in  a  public  way),  with  reference  to 
sustaining  public  credit,  and  their  responsibilities  to  the 
public  and  to  other  banks,  in  always  having  available  an 
adequate  gold  reserve,  are  of  recent  origin.  To  me  by  far 
the  most  interesting  phase  of  our  foreign  examinations  was 
the  personal  inquiry  made  of  the  actual  managers  of  these 
great  banks,  for  the  purpose  of  ascertaining  the  precise 
details  of  the  practical  workings  of  their  institutions.  And 
I  must  say,  in  passing,  that  the  representatives  of  the  com- 
mission received  the  greatest  possible  courtesy  from  the 
managers  of  all  these  great  banks;  especially  from  the  Gov- 
ernor of  the  Bank  of  England,  Mr.  Campbell,  now  retired, 
and  his  associates,  and  from  M.  Pallain,  the  Governor  of  the 
Bank  of  France.  The  Bank  of  France  has  been  extremely 
fortunate  in  the  past  in  the  character  of  its  managers,  but 
never  more  fortunate  than  in  the  person  of  the  present 
incumbent  of  the  office  of  Governor.  M.  Pallain  was  most 
courteous  to  us,  helping  us  in  every  possible  way,  not  only 
in  his  own  country,  but  through  his  influence  with  the 
representatives  of  other  countries.    The  official  managers  of 

10 


Address      by      Senator     A  I  dr  i  c  h 


the  Reichsbank  in  Berlin  also  furnished  us  with  the  fullest 
information  as  to  the  practical  workings  of  their  bank,  and 
of  the  German  system. 

The  central  banks  of  these  countries  are  all  private 
banks — that  is,  the  governments  have  no  ownership  or 
interest  in  their  shares.  The  provisions  for  the  control 
and  management  of  the  respective  banks  differ  widely. 
The  management  of  the  Bank  of  England  is  in  the  hands 
of  24  directors,  selected  largely  from  merchants — no  bank- 
ers, in  their  sense  of  the  word,  being  eligible  for  the  posi- 
tion— and  these,  including  the  governor  and  deputy  gov- 
ernor, elected  by  the  directors  from  their  own  number,  have 
control  of  the  business  of  the  Bank. 

With  regard  to  the  Bank  of  England,  I  have  frequently 
been  asked  why  such  an  institution,  serving  as  it  does  a 
limited  territory,  and  doing  the  business  of  a  small  island, 
should  require  one  hundred  millions  of  capital,  and  why 
the  success  of  this  bank  could  be  construed  as  a  guaranty 
of  the  efficiency  of  a  similar  bank  in  a  country  with  a  greater 
area  and  more  extensive  business.  I  think  the  answer  is 
obvious.  The  Bank  of  England  not  only  sustains  the  credit 
and  holds  the  reserve  of  the  banks  and  the  people  of  Eng- 
land, but  it  is  the  center  of  the  financial  system  of  the  entire 
British  Empire,  with  its  four  hundred  millions  of  popula- 
tion and  with  connections  and  affiliations  extending  around 
the  world.  Not  only  this,  but  its  friends  say,  and  I  must 
confess  with  great  truth,  that  the  Bank  of  England  is  to-day 
the  financial  center  and  clearing  house  of  the  world.  We 
know  that  sterling  bills  drawn  on  London  are  still  the 
highest  form  of  commercial  credit.  These  bills  sell  at  a 
lower  rate  in  Paris,  in  Berlin,  in  Amsterdam,  and  New 
York  than  any  other  form  of  commercial  credit.  The  Bank 
of  England  reaches  a  larger  territory  than  any  other  insti- 
tution in  the  world  and  serves  financial  interests  that  are 
exceeded  in  importance  and  amount  only,  if  at  all,  by  those 
of  the  United  States. 


National    Monetary     Commission 

The  governor  and  the  two  deputy  governors  of  the  Bank 
of  France  are  appointed  by  the  chief  of  state.  The  governor 
of  the  Bank  of  France  directs  the  general  policy  of  the  bank. 
The  two  hundred  largest  shareholders  elect  eighteen  regents 
and  censors  who  have  functions  of  limited  importance. 
The  Reichsbank  is  managed  by  the  directorium,  consisting 
of  a  president,  vice-president,  and  7  directors,  appointed  by 
the  Emperor.  The  stockholders  elect  a  central  committee 
of  15  members  with  limited  advisory  powers.  Except  as  to 
its  ownership,  the  bank  is  in  effect  a  government  institution 
under  the  control  and  management  of  expert  bankers. 

The  earnings  of  these  banks  are  not  excessive,  and  as 
their  charters  have  been  renewed  from  time  to  time,  con- 
ditions have  been  imposed  for  the  purpose  of  bringing 
about  a  greater  restriction  of  profits  or  a  more  satisfac- 
tory division  with  the  state.  In  Germany,  after  3^  per 
cent  is  paid  to  the  stockholders,  the  Government  receives 
three-quarters  of  the  net  earnings,  so  that  the  net  income  is 
divided  between  the  state  and  the  proprietors  of  the  bank. 
Neither  the  Bank  of  England  nor  the  Bank  of  France  is 
required  to  divide  directly  its  profits  with  the  state,  but  an 
indirect  division  takes  place.  The  amount  of  payments  to 
the  Government  by  the  banks  for  franchises,  and  for  taxes, 
direct  or  otherwise,  varies  greatly.  The  Bank  of  England 
pays  for  these  purposes  annually  about  $1,200,000.  In 
France  general  and  special  taxation  for  various  purposes  is 
levied  by  an  intricate  system,  but  the  figures  furnished 
to  us  show  that  it  amounts  to  practically  one-third  of  the 
net  earnings  of  the  bank,  and  this  has  been  true  for  a  series 
of  years.  In  Gennany  about  two-thirds  of  the  actual  profits 
go  to  the  Government  on  the  division  to  which  I  have 
referred.  In  1907  the  German  Government  received  as  its 
portion  of  the  profits  about  $8,400,000.  All  of  these  banks 
have  close  fiscal  relations  with  their  respective  Governments. 
Each  is  made  the  sole  depository  of  government  funds,  and 
all  payments  of  public  moneys,  for  ordinary  expenditures  or 

12 


Address     by     Senator     A  I  d  r  i  c  h 

interest  on  the  public  debt,  are  made  through  the  banks. 
They  are  also  required  to  render  further  service  to  the  Gov- 
ernment by  acting  as  agents  for  the  various  departments. 
In  the  main,  it  may  be  said  that  the  relations  of  these  insti- 
tutions to  the  financial  operations  of  their  respective  Gov- 
ernments is  largely  similar  to  that  occupied  by  the  United 
States  Treasury  with  reference  to  our  Government.  These 
services  are  rendered,  in  the  case  of  France  and  Germany, 
without  compensation ;  I  mean  without  direct  compensation. 

Bach  of  these  institutions  is,  in  a  large  sense,  a  bank  of 
banks.  About  65  per  cent  of  the  business  of  the  Reichs- 
bank  comes  through  other  banks.  The  Bank  of  France 
receives  about  70  per  cent  of  its  entire  business  from  other 
banking  institutions.  The  statement  of  the  Bank  of  Eng- 
land does  not  furnish  any  information  upon  this  subject. 
As  a  matter  of  fact,  as  I  have  already  stated,  whatever  busi- 
ness comes  from  the  banks  to  the  Bank  of  England,  except 
deposit  accounts,  comes  through  the  discount  houses,  and  not 
direct.  The  banks  also  differ  greatly  in  the  average  amounts 
of  their  deposits  and  in  the  amount  of  their  discounts  and 
loans.  The  direct  commercial  business  of  all  the  central 
banks  is  comparatively  unimportant. 

The  banks  also  differ  as  to  the  character  of  the  commer- 
cial paper,  or  bills  of  exchange,  which  they  accept  for  dis- 
count. The  Bank  of  England  requires  at  least  two  good 
British  names,  of  which  one  must  be  the  acceptor.  The  Bank 
of  France  requires  three  solvent  names,  of  which  two  must 
be  residents  of  France.  The  Reichsbank  requires  the  names 
of  at  least  two  solvent  persons.  In  France,  collateral  is 
accepted  in  place  of  the  third  name.  Generally  speaking, 
these  bills  represent  actual  transactions  and  are  not  what  are 
known  as  finance  or  accommodation  bills. 

The  average  duration  of  bills  discounted  in  England  is  from 
forty  to  fifty  days ;  in  France,  twenty-four  days;  and  in  Ger- 
many, thirty-three  days.  The  maximum  duration  of  bills 
discounted  in  England  is  four  months,  and  in  exceptional 

13 


National    Monetary     Commission 

cases  six  months;  in  France,  three  months,  with  a  possible 
renewal  in  exceptional  cases;  in  Germany,  three  months, 
with  renewal  in  case  of  farmers.  Foreign  nomenclature  for 
paper  of  this  kind  is  entirely  different  from  ours.  They  do 
not  use  promissory  notes  in  their  usual  banking  transactions. 
In  the  case  of  a  sale  by  a  merchant  or  manufacturer  on  credit 
or  time,  the  seller  makes  a  draft  on  the  purchaser  upon  the 
terms  agreed  upon,  usually  thirty,  sixty,  or  ninety  days,  and 
the  purchaser  accepts  the  draft.  This  acceptance  becomes  a 
domestic  bill  of  exchange,  or  a  domestic  bill  as  it  is  usually 
called.  A  bank  may  arrange  with  a  merchant  or  an  operator 
to  accept  his  bills  for  a  commission.  This  acceptance  be- 
comes a  prime  bill,  and  is  discounted  at  the  lowest  rate  by 
other  banking  institutions.  All  drafts  drawn  upon  or  by 
foreign  houses  or  banks  are  known  as  foreign  bills.  Trade 
bills  cover  ordinary  commercial  transactions  and  finance 
bills  cover  accommodation  loans.  Domestic  bills,  which 
answer  the  requirements  I  have  named  of  the  central  banks, 
are  known  as  bankable  bills,  as  they  are  accepted  for  redis- 
count under  proper  conditions. 

No  one  of  these  central  institutions  is  a  commercial  bank 
in  the  ordinary  sense  of  the  word ;  and  usage  is  bringing 
about  a  further  delimitation  of  their  powers  in  this  respect. 
They  pay  no  interest  on  deposits.  They  are  not  in  any 
general  sense  competitors  with  the  banks  of  deposit  and 
discount. 

These  central  banks  hold  practically  the  entire  specie 
reserves  of  all  the  banks  and  other  financial  institutions  of 
their  respective  countries.  The  Bank  of  England  holds  on 
an  average  a  reserve  of  about  45  per  cent  of  its  entire  lia- 
bilities, the  Bank  of  France  holds  about  70  per  cent  of  its 
demand  obligations  in  specie,  and  the  Reichsbank  holds  a 
specie  reserve  of  from  40  to  50  per  cent  of  its  current  de- 
posit obligations.  With  an  annual  gold  production  approx- 
imating $440,000,000,  and  with  a  constant  increase  of  the 
world's  stock  of  gold,  there  is  a  marked  tendency  to  increase 

14 


Address      by      Senator     A  I dr  i c h 

thfe  specie  reserves  of  all  the  great  banks  of  the  world. 
When  we  consider  the  rapid  growth  of  the  world's  business 
and  the  extent  of  the  banking  transactions  based  upon  these 
reserves,  the  necessity  for  their  protection  and  maintenance 
under  all  circumstances  becomes  apparent. 

The  great  difference  between  foreign  banking  systems 
and  our  own  is  found  in  the  concentration  and  mobiliza- 
tion of  reserves,  which  is  the  distinctive  feature  of  the 
European  systems.  Confidence  that  the  management  of 
these  great  central  banks  will  at  all  times,  in  prosperity 
and  in  adversity,  maintain  reserves  adequate  to  protect  the 
interests  of  all  their  people,  and  to  sustain  public  and  private 
credit,  gives  to  these  foreign  systems  impregnable  strength. 

In  this  connection  it  is  important  to  examine  the  methods 
adopted  by  the  central  banks  to  protect  their  reserves  and 
to  increase  their  holdings  of  gold  when  necessary.  The 
means  usually  and  successfully  relied  upon  for  these  pur- 
poses is  to  advance  the  bank  rate  of  discount  high  enough 
to  attract  gold  from  other  countries.  As  in  the  case  of 
commodities,  gold  follows  the  law  of  supply  and  demand ; 
and  if  England  bids  more  for  gold  than  France  or  Ger- 
many she  secures  it.  For  example,  in  1907  the  Bank  of 
England  rapidly  raised  its  rate  of  discount  from  4  to  7 
per  cent.  Mr.  Campbell,  the  Governor  of  the  Bank,  told 
us  the  result  was  that  gold  came  into  the  vaults  of 
the  Bank  from  24  different  countries,  including  British 
colonies.  This  enabled  the  Bank  of  England  to  protect  its 
reserves  and  to  furnish  a  large  amount  of  gold  for  shipment 
to  the  United  States.  The  power  of  the  Bank  of  England 
to  afford  relief  in  all  cases  is  extraordinary  when  we  consider 
that  the  specie  reserves  of  the  Bank  do  not  usually  exceed 
$160,000,000.  I  asked  the  question,  "  What  would  have 
happened  if  the  7  per  cent  rate  had  not  been  effective  ?  " 
The  answer  was,  "  We  should  have  advanced  the  rate  up  to 
10  per  cent  if  necessary  and  10  per  cent  will  bring  gold  out 
of  the  earth." 

15 


National    Monetary     Commission 

The  answer  was  intended,  of  course,  merely  as  an  indi- 
cation of  the  power  of  a  country  that  has  credit  and  unlim- 
ited resources  to  bring  gold  to  its  coffers. 

In  recent  years — certainly  for  nearly  half  a  century — there 
has  been  no  failure  of  this  method  to  protect  and  increase 
the  gold  reserve  of  the  great  European  banks. 

It  is  true  that  use  is  made  at  times  of  collateral  influences. 
It  is  now  the  policy  of  the  central  banks,  which,  I  think,  is 
very  generally  approved,  to  hold  short-time  foreign  bills  to  a 
considerable  amount,  and  this  custom  has  been  found  very 
helpful  in  protecting  gold  reserves  in  emergencies.  The 
central  banks  also  allow  interest  on  gold  in  transit  from 
distant  points.  But  the  main  reliance  has  been  upon  an 
advance  of  the  bank  rate,  and  this  method  has  been  found 
uniformly  successful  in  recent  times.  The  policy  of  charg- 
ing a  premium  for  gold  or  of  refusing  to  pay  gold  on  demand 
by  indirect  but  effective  means  is  no  longer  defended  by 
leading  authorities. 

In  this  connection  we  should  also  consider  the  practice 
of  the  joint-stock  banks  with  reference  to  their  own  reserves. 
The  question  of  the  character  and  extent  of  the  reserves  of 
these  banks,  as  well  as  those  of  the  central  banks,  is  left 
entirely  to  the  judgment  and  discretion  of  the  managers  of 
these  institutions,  and  no  attempt  is  made  by  legislation  to 
exercise  any  control  over  this  important  feature  of  banking 
practice. 

The  joint-stock  banks  do  a  very  large  proportion  of  the 
ordinary  commercial  business  of  the  several  countries.  The 
Bank  of  England,  for  example,  rarely  holds  over  $150,000,000 
in  bills  discounted  and  securities  of  all  kinds.  When  we 
consider  how  small  a  proportion  this  is  of  the  vast  business 
of  Great  Britain  we  shall  realize  that  the  large  commercial 
joint-stock  banks  control  practically  the  entire  commercial 
business  of  that  great  kingdom. 

The  joint-stock  banks  hold  practically  no  specie  reserve. 
In  making  statements  of  their  condition  they  report  the 

16 


Address     by     Senator     A  I d  r  i  c  h 

amount  of  their  "  cash  in  hand  and  at  bank  "  in  one  item, 
which  represents  the  only  cash  reserves  of  the  institutions. 
The  cash  on  hand  is  not  stated  separately,  and  no  amount 
of  persuasion  would  induce  them  to  segregate  these 
amounts.  As  a  matter  of  fact  all  of  these  banks  hold  in 
their  own  vaults  only  what  we  would  call  "till  money," 
and  this  sum  rarely  if  ever  exceeds  3  or  4  per  cent  of  their 
deposit  liabilities.  The  men  who  manage  these  banks 
assert  that  a  credit  at  the  central  bank  is  better  and  safer 
for  their  purposes  than  a  corresponding  amount  in  their 
own  possession.  We  were  told  that  it  is  the  habit  of  the 
large  banks  to  estimate  the  amount  of  money  needed  in  their 
ordinary  transactions  from  day  to  day,  and  this  amount  is 
withdrawn  from  the  central  bank  and  constitutes  practically 
the  only  amount  of  cash  on  hand  in  any  of  the  institutions. 
The  amount  of  "cash  in  hand  and  at  the  bank,"  taking  the 
two  together,  averages  about  14  or  15  per  cent  of  the 
current  liabilities  of  the  London  Clearing  House  banks 
which  report  once  a  month. 

The  joint-stock  banks,  however,  have  a  secondary  reserve 
in  "money  at  call  and  at  short  notice."  In  London  this 
money  is  largely  loaned  to  discount  houses  on  bankable  bills 
and  to  merchants  and  others  on  stock  exchange  and  similar 
securities.  The  banks  usually  hold  on  an  average  about  15 
to  20  per  cent  of  their  liabilities  in  this  secondary  reserve. 
In  addition,  the  English  banks  usually  hold  for  investment 
purposes  government  securities  equal  at  least  to  their  capital 
and  surplus.  This  rule  does  not  apply  to  continental  banks, 
however.  All  the  joint-stock  banks  hold  a  very  important 
reserve  in  their  short-time  bankable  bills.  The  fact  that 
these  can  always  be  used  for  rediscount  gives  to  them  the 
greatest  possible  value  as  an  available  reserve.  In  fact, 
usage  has  given  to  them  almost  a  legal-tender  quality. 

It  is  the  policy  of  the  joint-stock  banks  in  times  of  stress 
to  strengthen  their  reserves  by  increasing  their  balances 
at  the  central  bank.     This  is  usually  done  by  direct  or 

17 


National     Monetary     Commission 

indirect  rediscount  of  their  bankable  bills.  By  this  process 
they  are  enabled  to  transform  at  once  into  a  reserve  an 
asset  which  otherwise  has  no  value  in  this  regard.  It  enables 
these  institutions  to  extend  credit  to  deserving  customers 
to  the  amount  of  four  to  ten  times  the  sum  thus  added  to 
their  reserves. 

This  description  of  the  functions  and  processes  of  the 
European  central  and  joint-stock  banks  will  enable  us  to 
arrive  at  a  better  understanding  of  the  methods  employed 
by  these  institutions  to  furnish  relief  when  financial  trouble 
is  apprehended  or  panicky  conditions  exist. 

The  general  policy  adopted  in  times  of  apprehension  or 
distress  is  for  the  central  institution  to  strengthen  its 
reserves  by  the  use  of  methods  which  I  have  described  and 
at  the  same  time  to  extend  credit  liberally  to  everyone 
whose  solvency  and  condition  entitles  him  to  receive  it.  It 
is  this  simultaneous  strengthening  of  reserves  and  extension 
of  credits  which  gives  potency  and  effect  to  the  modern 
system  of  dealing  with  periods  of  distrust.  The  fact  that 
in  modern  times  the  means  which  I  have  described  have  not 
failed  to  afford  relief,  to  allay  excitement,  to  restore  confi- 
dence and  credit  in  times  of  threatened  or  real  trouble  can 
not  but  create  a  profound  impression  upon  all  who  are 
honestly  seeking  a  solution  of  our  monetary  problems. 

In  this  country  we  have  adopted  precisely  the  opposite 
policy.  For  instance,  we  have  a  law  governing  national 
banks,  which  requires,  in  central  reserve  cities,  a  lawful 
money  reserve  of  25  per  cent  of  outstanding  deposit  liabili- 
ties. Although  we  may  assume  that  these  reserves  were 
created  for  emergency  purposes,  when  the  emergency  arises 
and  a  bank  seeks  to  use  its  reserves  it  is  forbidden  to  do  so. 
Under  no  circumstances  may  it  reduce  its  reserves  below 
25  per  cent.  If  the  reserve  is  24^^  per  cent,  not  only  is 
further  use  prohibited,  but  the  bank  must  stop  all  dis- 
counts, all  extensions  of  credit.  It  makes  no  difference 
how  much  a  customer  needs  a  loan,  what  his  credit  is,  or 

18 


Address      by      Senator     A  I dr  i ch 

wHat  his  collateral  may  be.  Possibly  his  business  salva- 
tion, the  savings  of  a  life,  or  the  accumulation  of  genera- 
tions are  imperiled.  I  think  it  is  not  necessary  for  me  to 
enlarge  upon  the  absurdity  of  this  system. 

The  success  of  the  European  systems  is  based  upon  the 
policy  of  using  reserves  promptly  and  fully  in  cases  of 
emergency.  Take  the  case  of  the  Bank  of  England.  It 
matters  not  whether  the  use  suggested  is  in  lyondon,  Bir- 
mingham, Liverpool,  or  in  Australia;  the  reserve  can  be 
drawn  upon,  as  water  is  drawn  from  a  great  reservoir  in 
order  to  put  out  a  fire  before  it  becomes  a  conflagration, 
and  before  the  time  when  the  application  of  water  would 
be  as  useless  as  if  it  were  poured  into  the  ocean. 

The  European  banks  take  these  matters  at  their  inception, 
and,  by  means  of  a  concentration  of  reserves,  they  are  ready 
at  any  minute  to  furnish  the  necessary  means  and  the  neces- 
sary credits  to  prevent  disasters  such  as  those  we  have  suf- 
fered, and  from  which  we  shall  continue  to  suffer  unless  we 
do  something  to  reorganize  and  strengthen  our  financial 
system. 

The  question  of  note  issues,  the  manner  of  their  issue, 
and  their  use  in  the  extension  of  credits  and  to  meet  un- 
usual demands  is  an  important  one  in  this  connection. 
The  Bank  of  England  is  allowed  to  issue  notes  against 
government  securities  to  the  extent  of  about  $90,000,000, 
and  any  further  issue  must  be  covered  by  specie.  The 
note  issue  of  England  has  varied  but  little  from  1844 
to  the  present  time.  While  the  business  of  England  and 
of  the  British  Empire  has  doubled  and  quadrupled  and 
multiplied,  I  do  not  know  how  many  fold  in  that  time,  the 
amount  of  note  issues  has  remained  substantially  the  same. 

The  great  use  of  checks  and  other  instruments  of  credit, 
to  which  the  people  of  England  are  accustomed,  seems  to 
render  the  enlarged  use  of  notes  unnecessary.  In  France 
notes  are  issued  without  any  restriction  except  as  to  amount; 
but  under  the  policy  and  practice  of  the  Bank  of  France  its 


19 


National     Monetary     Commission 

notes  are  practically  coin  certificates.  For  the  ten  years 
ending  in  1908  the  Bank  of  France  held  in  specie  an  aver- 
age of  83.5  per  cent  of  its  outstanding  note  issues.  Against 
an  uncovered  issue  of,  say,  $100,000,000,  the  Bank  of 
France  held  in  round  numbers  one  hundred  and  forty 
millions  of  bankable  bills.  The  Reichsbank  is  authorized 
to  issue  untaxed  notes,  first  to  the  amount  of  specie  and 
government  notes  and  notes  of  other  banks  which  it  holds ; 
second  to  the  amount  of  an  arbitrary  sum,  known  as  the 
"contingent,"  which  now  is  fixed  at  about  $130,000,000. 
This  contingent  has  been  recently  increased  upon  the 
recommendation  of  the  bank  inquiry  commission  from 
$118,000,000  to  $130,000,000,  with  a  further  increase  on 
settlement  days  at  the  end  of  the  quarters  to  $178,500,000. 
The  amount  of  this  contingent,  you  will  notice,  is  at  most 
only  about  $3  per  capita  for  Germany,  a  rather  incon- 
siderable sum  when  you  think  of  the  $35  per  capita 
which  we  have  in  the  United  States.  Any  notes  issued 
in  excess  of  the  aggregate  of  these  amounts  are  taxed 
by  the  Government  at  the  rate  of  5  per  cent.  All  notes 
issued  by  the  Reichsbank,  taxed  or  untaxed,  must  be  covered 
by  one-third  of  the  amount  in  specie  or  government  notes 
and  two-thirds  in  bills  of  exchange  of  the  character  I  have 
described.  The  redeemability  of  the  notes  in  each  of  the 
great  banks  is  amply  secured  by  legal  provisions  and  limita- 
tions. Perhaps  I  should  say  in  passing  that  there  are  a  few 
banks  in  England  which  have  retained  the  right  of  issue 
since  1844.  Their  notes,  however,  amount  to  but  a  fraction 
of  I  per  cent  of  the  total  issues  of  the  Bank  of  England. 
There  are  also  certain  state  banks  in  Germany — the  Bank 
of  Bavaria,  the  Bank  of  Saxony,  and  two  others — that  have 
retained  the  right  of  issue  given  them  under  the  bank  act 
of  1875.  But  the  outstanding  notes  of  these  banks  amount 
to  only  3  yi  per  cent  of  the  total  note  issue  of  the  Empire. 
In  each  of  these  countries  we  found  that  the  monopoly  of 
note  issues  by  central  banks  meets  with  universal  approval 


Address      by      Senator     Aldrich 

from  all  classes.  I  think  tHere  can  be  no  dissent  from  the 
statement.  In  the  discussions  which  recently  took  place  in 
Germany,  and  in  those  in  Belgium  at  the  time  of  the  last 
extension  of  the  charter  of  the  Bank  of  Belgium,  all  classes, 
socialists,  agrarians,  and  others,  approved  fully  the  policy  of 
confining  note  issues  to  one  central  bank  of  issue. 

The  average  fluctuations  in  the  amount  of  notes  outstand- 
ing from  time  to  time  differ  considerably  in  these  three 
countries.  In  England,  where  the  volume  of  note  issues  is 
practically  constant,  the  element  of  elasticity  of  issue,  which 
in  Germany  and  France  is  met  by  recurring  enlargements 
and  contractions  in  the  volume  of  notes,  is  met  by  changes 
in  the  volume  of  checks  and  other  credit  instruments,  and 
the  amount  of  credits  given  by  the  Bank  of  England  and 
other  banking  institutions. 

It  is  apparent  that  if  we  are  to  profit  by  the  experience 
of  other  countries,  if  there  is  anything  in  their  methods 
that  may  be  of  advantage  to  us,  there  are  only  two  systems 
of  note  issue  to  be  considered — one,  by  a  central  bank  under 
government  control  or  restrictions,  and  the  other  the  Scotch 
system,  the  main  features  of  which  have  also  been  adopted 
by  Canada. 

The  uniformity  of  opinion  with  reference  to  the  wisdom 
of  a  unification  of  issues  is  not  shared  by  the  Scotch  bankers, 
nor,  I  think,  by  Scotchmen  in  general.  Those  who  believe 
in  a  central  bank  of  issue  insist  that  the  Scotch  system  of 
eight  banks  with  1,200  branches  is  not  adapted  to  the 
wants  of  a  great  commercial  country,  and  is  of  necessity  a 
provincial  system. 

The  Scotch  note  issue  is  at  present  based  first  upon  a  fixed 
amount  of  uncovered  notes  equal  to  the  outstanding  issues 
in  1845.  ^^^  total  amount  of  these  is  about  ;^2, 700,000,  or 
$2.76  per  capita,  and  beyond  this  limited  uncovered  issue  the 
law  provides  that  all  emissions  shall  be  covered  by  specie. 


21 


National    Monetary     Commission 

The  Scotch  banks  depend  upon  the  Bank  of  England  for 
their  specie  and  for  support  in  times  of  trouble,  as  fully  as  do 
the  English  banks. 

London  sends  to  Scotland  periodically  a  considerable 
amount  of  gold,  which  is  "often  held  there  only  long  enough 
to  enter  into  the  accounts  of  the  Scotch  banks,  and  is  then 
returned  to  London,  sometimes  in  the  original  packages. 

A  considerable  proportion  of  the  large  Scotch  industrial 
houses  keep  regular  accounts  in  London,  and  the  principal 
Scotch  banks  have  branches  in  London. 

I  do  not  mean  to  underrate  the  merits  of  the  Scotch 
system.  It  has  been  impressed  upon  me  there  are  no  better 
bankers  in  the  world  than  the  Scotch;  they  have  an  indi- 
viduality and  vigor  in  expression  and  action  which  are 
admirable.  Nowhere  does  the  personal  equation  stand  for 
more.  Aside  from  the  manner  of  note  issue  the  distin- 
guishing feature  of  their  system  is  a  method  of  cash  credits 
by  which  a  farmer  or  small  trader  in  any  part  of  Scotland, 
with  one  or  two  of  his  neighbors  as  guarantors,  can  estab- 
lish a  banking  credit  for  a  fixed  sum.  The  bank  honors 
his  drafts  for  any  amount  within  this  limit,  and  the  cus- 
tomer pays  interest  only  upon  the  sums  actually  drawn. 
There  can  be  no  question  that  this  system  has  been  of 
benefit  in  developing  the  rural  communities  of  Scotland. 
The  development  of  this  system,  however,  has  been 
along  lines  that  are  unlike  any  that  appeal  to  American 
spirit. 

It  is  conceded  that  the  Scotch  system  depends  largely  upon 
an  elaborate  system  of  branches,  which  is  not  applicable,  in 
my  opinion,  to  the  United  States.  The  eight  banks  of 
Scotland  are  practically  one  bank.  The  managers  of  the 
principal  banks,  living  in  Edinburgh  or  Glasgow,  meet 
frequently  to  fix  the  rate  of  discount  on  loans  and  the 
amount  of  interest  to  be  allowed  on  deposits.  Every 
particular  of   importance  in  banking  operations  or  with 


22 


Address      by      Senator     A  I dr  i c  h 

reference  to  note  issues  is  fixed  by  agreement  of  this 
informal  organization  for  defense  and  protection. 

The  rate  of  interest  charged  by  the  Scotch  banks  is 
one-half  of  i  per  cent  higher,  on  an  average,  than  for  the 
equivalent  service  in  England. 

Scotch  methods,  while  admirable  in  their  surroundings, 
have  little  value  in  considering  the  requirements  of  this 
great  country. 

The  Canadian  system,  which  is  largely  based  on  the 
Scotch  idea,  has  many  intelligent  and  persistent  advocates 
in  the  United  States.  It  is  certain  that  this  system  should 
and  will  receive  careful  attention.  Members  of  the  com- 
mission have  made  personal  investigations  in  Canada,  and 
these  have  been  supplemented  and  extended  by  the  valuable 
information  contained  in  the  volumes  referred  to  in  our  list 
of  publications. 

Canada  has  29  banks  with  about  2,000  branches.  They 
are  practically  controlled  by  the  Bankers'  Association,  a 
legalized  institution  with  certain  definite  functions.  The 
control  of  the  banks,  however,  is  not  always  under  authority 
conferred  by  law,  or  even  by  the  constitution  and  by-laws 
of  the  association,  but  by  agreements  for  mutual  protection, 
which  are  equally  effective.  Through  this  efficient  busi- 
ness arrangement  the  banks  of  Canada  are  controlled  as 
thoroughly  as  the  Scotch  bankers  control  the  banking  sys- 
tem of  Scotland.  The  Bank  of  Montreal  is  practically  the 
central  bank  of  Canada,  but  Canadian  banks  also  habitually 
carry  large  balances  in  New  York  and  London,  and  in  times 
of  need  rely  for  support  upon  those  financial  centers. 

Canada  has  an  area  about  equal  to  that  of  the  United 
States.  Out  of  her  29  banks,  19  are  located  in  Toronto  or 
Montreal,  and  the  whole  system  is  controlled  by  the  bankers 
of  these  cities.  There  are  but  3  banks,  and  those  not 
important,  in  the  vast  country  west  of  Ontario.  Think  what 
the  American  system  would  be,  and  how  it  would  be 
regarded,  if  we  had  but  two  or  three  banks  west  of  Buffalo, 

23 


National     Monetary     Commission 

and  if  the  bankers  of  New  York  and  Boston  should  decide 
upon  the  policy  and  the  rate  of  discount  of  the  whole 
system  of  the  United  States! 

Competent  authorities  base  the  success  of  the  Cana- 
dian system  upon  their  extensive  use  of  branches.  Of 
course,  I  realize  that  there  are  in  this  country  a  great 
many  intelligent  men  who  think  we  ought  to  have  a 
system  of  branch  banking  like  the  Canadian;  but  unless 
I  greatly  mistake  the  character  of  the  American  people 
that  will  not  be  possible.  In  my  judgment  any  system 
which  is  to  be  adopted  in  this  country  must  recognize  the 
rights  and  the  independence  of  the  25,000  separate  banks 
in  the  United  States. 

Of  course,  you  realize  that  in  banking,  as  in  everything 
else,  the  personal  equation  must  always  remain  one  of  the 
most  important  elements  to  be  considered.  The  men  who 
deposit  in  or  borrow  from  small  country  banks,  or  banks 
in  the  large  towns,  who  have  been  accustomed  to  dealing 
with  men  who  are  their  neighbors  and  friends  who  have 
a  sympathetic  appreciation  of  their  wants,  will  not  be 
willing  to  consent  that  legislation  shall  authorize  the  dis- 
placing of  such  banks  by  agents  sent  from  the  banks  of  New 
York  or  Chicago  to  conduct  the  business  of  these  smaller 
communities ;  men  whose  first  interest — I  am  almost  tempted 
to  say  whose  only  interest — would  be.  the  earning  of  the 
most  money  they  could  for  their  principals,  and  who  would 
naturally  have  very  little,  if  any,  concern  for  the  develop- 
ment of  the  communities  in  which  they  were  located.  So 
I  think  I  may  say  with  certainty  that  any  new  system  or 
organization  we  may  adopt  must  be  engrafted  upon  that  now 
existing.  We  can  not  impair  the  usefulness  of  existing 
banks,  or  take  away  from  them  any  of  their  functions.  If 
we  are  to  have  an  organization  outside  of  them,  and  outside 
of  the  present  organization  of  clearing  houses,  it  must  be 
one  that  will  be  the  servant  and  not  the  master  of  exist- 
ing organizations.     We  must  first  consider  existing  condi- 

24 


Address      by      Senator     A  I dr  i c h 

tions.  We  must  remember  that  after  all  monetary  science 
is  not  an  exact  science.  Political  economy  has  no  laws 
applicable  to  every  community  and  under  all  circumstances. 
That  system  is  best  for  any  country  which  best  responds  to 
the  needs  and  requirements  of  its  people. 

Your  President  has  alluded  to  the  fact  that  he  is  not  sure 
whether  I  have  a  plan  or  not.  I  have  a  plan  which  I  will 
mention  a  little  later;  but  at  present  I  may  say  that  the 
Commission  has  not  yet  taken  up  or  considered  the  question 
as  to  the  proper  system  to  be  adopted  by  the  United  States; 
and  they  will  not  take  up  that  question  for  consideration 
until  the  case  is  fully  presented  to  the  American  people,  and 
we  can  secure  their  judgment  and  their  cooperation  in  the 
adoption  of  a  plan  which  we  trust  will  be  for  the  benefit  of 
the  entire  country. 

I  have  had  occasion  to  say  a  number  of  times  in  the  last 
two  weeks  that  so  far  as  I  am  concerned,  if  I  were  given  a 
blank  sheet  of  paper,  with  absolute  authority  to  write  upon 
it  the  terms  and  conditions  of  a  banking  and  currency  bill 
which  I  thought  should  be  adopted  by  the  United  States,  I 
could  not  do  it.  Eighteen  months  ago  I  thought  I  had 
some  knowledge  of  this  subject.  I  had  been  studying  these 
questions  for  thirty  years;  but  the  subject  is  so  vast;  it 
involves  so  many  collateral  questions,  which  are  intricate 
and  complex  in  their  character,  that  it  would  not  be  possible 
for  me,  or  for  any  man,  without  more  careful  study  than  I 
have  been  able  to  give  the  question,  to  determine  what 
plan  should  be  adopted. 

I  have  approached  this  question — and  I  know  that  in  this 
regard  I  speak  for  every  member  of  the  Commission — with 
an  absolutely  open  mind.  And  I  have  only  one  request  to 
make  of  the  people  of  the  United  States— that  they  also 
keep  their  minds  open  until  this  case  can  be  fully  presented 
to  them. 

I  have  been  greatly  gratified  by  the  fact  that  on  every 

hand  thoughtful  men  have  refrained  from  expression  of 

• 

25 


National    Monetary     Commission 

opinion  upon  this  subject,  and  have  been  willing  to  await 
an  examination  of  the  information  which  we  are  to  furnish, 
and  which  is  included  in  the  printed  list  of  our  publica- 
tions submitted  to  you  to-night. 

I  realize,  perhaps  more  fully  than  any  of  you,  the  diffi- 
culties which  will  confront  us  in  the  construction  of  any 
plan.  I  think  it  was  McLeod  who  said  that  the  study  of 
monetary  questions  is  one  of  the  great  causes  of  insanity. 
We  shall  have  to  deal  with  men  reasonably  sane  on  other 
subjects,  but  whose  insanity  on  this  is  apparent  to  all.  We 
shall  be  confronted  with  objections  from  different  classes 
of  men;  one  cocksure  that  they  know  now  just  what 
system  should  be  adopted  and  equally  certain  that  no  other 
plan  is  possible;  another,  demagogues  who  are  attracting 
public  attention  to  themselves  by  their  incoherent  utter- 
ances made  expressly  for  self-exploitation. 

We  shall  also  be  confronted  with  people  who  will  insist 
that  this  subject  is  so  great  and  surrounded  by  so  many 
difficulties  that  it  is  impossible  to  do  anything  with  it ;  that 
we  must  sit  down  and  meekly  submit  to  whatever  evil 
results  may  follow  from  obsolete  methods.  Now,  I  greatly 
mistake  the  temper  and  intelligence  of  the  American  people 
if  a  decision  and  settlement  of  this  question  can  be  long  de- 
layed. It  means  too  much.  It  is  of  too  vital  interest  to  every 
person  in  the  United  States  to  tolerate  unnecessary  delay. 
It  is  said  we  will  not  be  able  to  solve  this  question  on  account 
of  differences  which  will  arise  with  reference  to  claims  of 
localities;  for  instance,  as  between  New  York  and  Chicago, 
or  Chicago  and  the  large  cities  of  the  Mississippi  Valley. 
Now,  this  question  will  not  be  settled  satisfactorily  until  it 
is  settled  from  a  national  standpoint.  I  believe  fully  in  the 
solidarity  of  interest  between  all  sections  and  all  the  people 
of  the  United  States.  You  can  not  have  continuous  pros- 
perity in  New  York  and  adversity  in  Chicago,  or  prosperity 
in  Chicago  and  adversity  in  New  York.  What  affects  one 
section  necessarily  affects  another. 


Address      by      Senator     A  I  dr  i  c  h 

It  is  said  we  shall  encounter  political  objections,  that  no 
organization  which  we  may  suggest  can  be  adopted  on 
account  of  political  prejudices  of  the  past  or  of  the  present. 
Criticisms  are  made  of  the  First  and  Second  banks  of  the 
United  States.  I  know  of  no  one  who  would  for  a  moment 
think  of  suggesting  a  system  or  look  to  the  adoption  of 
an  organization  at  all  like  either  the  First  or  Second  Bank 
of  the  United  States.  Conditions  have  entirely  changed 
since  their  day.  There  are  a  dozen  banks  in  New  York, 
and  many  in  other  parts  of  the  country,  that  are  more  im- 
portant in  their  operations  and  in  their  character  than  either 
of  those  banks.  Present  conditions  necessitate  entirely 
different  treatment.  I  have  the  utmost  confidence  in  the 
intelligence  and  ultimate  good  judgment  of  the  American 
people,  and  I  believe  if  it  should  be  thought  wise  by  the 
commission,  supported  by  the  consensus  of  intelligent  opin- 
ion of  the  people  of  the  United  States,  to  adopt  any  system, 
that  neither  the  political  prejudice  of  the  past  nor  the  ghost 
of  Andrew  Jackson,  that  great  man  who  died  many  years 
ago,  will  stand  in  the  way.  The  best  interests  of  the  people 
of  the  United  States  are  more  important  than  political 
memories. 

The  task  in  which  we  are  engaged,  and  in  which  you 
must  be  engaged,  is  too  important  in  its  results — it  means 
too  much  for  us  to  think  for  a  moment  that  any  organiza- 
tion could  be  adopted  or  would  be  adopted  that  might  be 
subject  to  political  manipulation  at  any  time. 

No  one  of  the  great  European  banks  I  have  described 
has  ever  been  influenced  in  its  action  by  any  political  party, 
and  no  such  charge  has  ever  been  made.  Take  the  case  of 
the  Bank  of  France,  for  instance.  The  Bank  of  France  was 
organized  by  the  first  Napoleon,  and  a  provision  was  put  into 
its  charter  that  the  governor  of  the  bank  should  be  appointed 
by  the  chief  of  state  ;  not  by  Emperor  or  King  or  President, 
but  by  the  chief  of  state. 


27 


National    Monetary     Commission 

• 

Now,  the  Bank  of  France  has  always  been  from  that  day 
to  this  the  Bank  of  France  indeed — the  bank  of  the  people 
of  France — ^sustaining  her  credit,  upholding  her  honor.  No 
ministry  and  no  party  could  afford  to  ignore  for  a  moment 
this  great  fact.  It  would  result  in  the  dismissal  of  any 
ministry  or  the  overthrow  of  any  party  which  undertook 
for  a  moment  to  influence  the  action  of  this  great  institu- 
tion adversely  to  the  public  interests.  The  Bank  of  France 
has  gone  on  under  emperor,  under  king,  under  revolu- 
tionary government,  and  under  the  Republic — always  the 
bank  of  the  state  and  the  bank  of  the  people  of  France. 
Why,  in  the  time  of  the  Commune  notes  of  the  Bank  of 
France  were  current,  and  the  premium  on  gold  in  Paris 
was  less  than  the  premium  on  currency  in  New  York  in 
1907,  showing  something  of  the  character  of  this  great  insti- 
tution, which  has  a  place  in  the  heart  of  every  Frenchman 
that  is  absolutely  unique. 

When  I  was  in  Paris  last  year  I  met  a  grandson  of  one  of 
Napoleon's  great  marshals,  who  was  then  investigating  the 
early  history  of  the  Bank  of  France,  and  who  had  in  his  pos- 
session a  dispatch  sent  by  Napoleon  from  the  field  of  Aus- 
terlitz,  just  after  the  battle,  in  which  he  called  the  attention 
of  the  representative  of  the  Bank  of  France  to  the  fact  that 
the  success  and  permanence  of  that  institution  were  of 
equal  or  even  greater  consequence,  in  his  opinion,  to  the 
people  of  France  than  the  victories  he  was  achieving  on  the 
field  of  battle. 

I  realize,  however,  that  it  is  already  sought  by  means  of 
political  influences  to  discredit  any  action  of  this  Commis- 
sion. I  know  also  that  professional  writers  are  busy  erect- 
ing creatures  of  shreds  and  patches  in  this  great  field  of 
discussion  for  the  sole  purpose,  apparently,  of  furnishing 
themselves  amusement  in  pulling  them  apart,  limb  by  limb, 
and  calling  attention  to  the  fact  that  after  all  they  are  not 
men  of  life  and  action. 


28 


Address      by      Senator     A  I  dr  i  c  h 

I  have  said  I  have  a  plan.  I  have  a  plan  which  was  sug- 
gested by  the  ambassador  to  France,  who  has  just  addressed 
you — a  plan,  or  I  should  more  properly  say  a  firm  purpose 
to  find  a  plan,  to  make  the  United  States  the  financial 
center  of  the  world,  a  position  she  is  entitled  to  by  virtue 
of  her  resources,  her  vast  accumulations  of  wealth,  and  her 
surplus  capital. 

We  shall,  of  course,  expect  criticism  of  any  plan  we  may 
recommend.  Honest  criticism  is  the  best  thing  we  can 
possibly  have  if  we  are  to  secure  wise  results.  I  am  confi- 
dent that  when  we  do  reach  a  conclusion — which  can  not 
be  for  many  months  yet — we  shall  have  the  cooperation  of 
the  economists  and  business  men  of  this  great  financial 
metropolis.  If  we  do  not  have  it,  it  will  be  because  you 
fail  to  respond  to  our  earnest  appeal  to  you  for  your  assist- 
ance in  the  solution  of  this  great  problem.  I  shall  be 
greatly  disappointed  if  your  response  is  not  along  the  line 
of  a  sincere  and  patriotic  cooperation. 


29 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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CD^77afl3b3 


